Congress returns, and the fiscal cliff is waiting

Some Republicans are shifting their positions—slightly — on revenue.

The lame-duck Congress returned on Nov. 27 from its brief Thanksgiving recess. Producing legislation to avert the ‘fiscal cliff’ is the top priority, although other legislation, in particular the Defense Authorization Act, is also on the agenda. There is no immediate hurry for Congress to complete appropriations work since the government is funded through March 2013, but word is that the appropriations staff are preparing an omnibus bill to finish some or all of the 2013 spending legislation.

The election results seem to have edged Congress a bit farther away from its impasse on revenue, although we should not be too comforted by the signals we have seen this week. It seems increasingly likely that tax increases in some form will be a part of the final package, although there is certainly no consensus on how to increase government revenue. Many Republicans oppose raising tax rates, but may go along with closing loopholes or limiting deductions in return for legislation that cuts spending on entitlements (one example is a proposal to raise the age of eligibility for Medicare). This week several Republicans—at last count, Sens. Lindsey Graham, R-S.C., Bob Corker, R-Tenn., and Saxby Chambliss, R-Ga., and Rep. Peter King, R-N.Y., — have announced they will abandon their pledge never to raise taxes.

President Obama is building a case against raising any income taxes on middle-income taxpayers. The White House released a report on Nov. 26 that outlines the effect of some of the expiring tax provisions on middle income taxpayers. According to the report, middle class families with two children and incomes between $50,000 and $85,000 would pay an average of $2,200 more if the Bush-era tax cuts expire (those cuts include benefits like the marriage penalty fix and increased child care tax credits). The report details potential damage to the U.S. Gross Domestic Product, citing declines in retail spending, if middle income taxpayers are hit with new taxes. The report does not make a case for continuing the current payroll tax holiday, however. It appears likely that Congress and the President will let the payroll tax holiday expire, and that Social Security taxes and unemployment withholding will go up on Jan. 3 for all income levels.

Fiscal cliff negotiations must also address another critical issue, the federal debt limit, which is set by law at $16.4 trillion. The national debt is now approaching $16.3 trillion. Democrats hope Republicans will agree to an increase as part of a deal and a similar show-down to that of summer 2011, will be avoided.

The pending spending cuts are generating less media discussion than expiring tax provisions at this point. One hopes that may be because there is no real support for allowing the sequester cuts to take effect. The Capitol Hill newspaper Politico has reported that Republicans support postponing the sequester to find a different solution. Keep in mind, however, that some level of spending cuts, if not the full amount of the sequester (e.g. 8.2 percent across the board cuts to non-defense programs) will almost certainly be part of a final resolution. The revenue provisions remain in the spotlight for now.